A modern day feudal system for real estate

There is an interesting dynamic unfolding in the housing market. Real estate agents in places like California are arguing that there is a lack of inventory and are also generally against the government unloading blocks of properties to big investors. Why? There has been bulk selling and buying to the investor class and a large amount of crowding out has occurred. This brings about an interesting set of problems for your average buyer in the current market. They are competing with swaths of big investors but also local flippers trying to make a quick buck once again courtesy of low interest rates and another mania in some markets. SoCal is now in a mania again as you will see with some of the patterns occurring. This is also happening in many other states as well. A new feudal system has emerged. The banks were bailed out by the Fed, were allowed to circumvent accounting standards, and now deep pocket investors in the financial class are buying up these places either to increase prices on flips or to hike up rents. In the end, if you want to compete in today’s market you need to bow down to the Fed, put on a football helmet and go head-to-head with big investors, flippers, suckers, and take on a massive mortgage.

Seeking out your own fiefdom

The Los Angeles Times highlighted the declining inventory for entry level homes with a stunning graphic:

“(LA Times) Rogers said he has gone into escrow twice and lost out both times, as other buyers have been willing to pay more. He has been shocked by competing investors paying $75,000 to $100,000 more than what he has estimated some homes to be worth.

The big speculators have pooled all their money; they invest and they bid them up," he said. "It's crazy. Some of them, they pay pretty close to what it's actually probably worth fixed up, but then by the time they put money into it, they are going to be $50,000 to $60,000 over."

First some analysis of the chart. The drop in inventory in various metro areas is stunning. Keep in mind the demographics of your entry buyer. They are younger Americans that are less affluent and very likely to be in student debt already. Many markets in California are being crowded out from top-tier San Francisco to places like Fresno. It is worse for places like Phoenix Arizona where a whopping 40 percent of all purchases were done with all cash. The chase for yield has caused prices to surge in an area that is economically depressed and carries lower household wages:

Source: DataQuick

The median price in Phoenix is up over 30 percent year over year. You read correctly, the year over year median price is up by 30 percent. Did incomes go up by this much? Of course not. For years you have nearly half of all properties being bought in this market going to investors. Rent prices have surged while banks leisurely leak out inventory while shelling out the best deals to other financial institutions with deep wallets. In other words all the bailouts were to create another bubble and crowd out the typical buyer and also, squeeze the wallets of many renters who probably are not able to buy.

Going back to the paragraphs above, the fact that investors are bidding prices up by $75,000 to $100,000 over market valuations in this current economy is very reminiscent to a mania. If you view the world through the lens of a hammer everything looks like a nail. These bulk investors are diving in head first here and entry level buyers are competing against large funds. This bubble is different. During the early 2000s you were basically competing against anyone with a pulse. Today you are competing with big pocket investors, hedge funds, flippers, and large real estate investment funds.

Hot money will go to many areas. For example, the Canadian housing bubble is seeing a good portion of money leaking out into the Florida market:

Nearly 75 percent of foreign buyers in Miami come from Canada. I wish we had figures like this for California but I would venture to guess that most of the foreign money coming in is from China (that is experiencing a housing bubble even bigger than the one we lived through).

All this action has made it tougher for first time home buyers who need to over-bid or take on massive loans with the sticker price of low interest rates. You would think that first time buying would be high but it is not:

Source: NAR

The Federal Reserve is largely helping big financial institutions with QE3. Those that own and can refinance lower save some bucks but this is merely an afterthought of the Fed action. Big money is being made by the banking system right now. You saw this week Wells Fargo announced stellar profits even in the midst of being sued for their FHA insured loan practices. What is Wells Fargo being accused of?

"(SF Gate) Yet another major bank has engaged in a long-standing and reckless trifecta of deficient training, deficient underwriting and deficient disclosure, all while relying on the convenient backstop of government insurance," said Preet Bharara, U.S. attorney for the Southern District of New York, where the suit was filed.”

Why in the world would the Fed and government setup programs to bulk sell to investors when there is a clear demand from buyers? We’ve already noted the amount of flippers entering the Southern California market. Las Vegas is seeing an increase in flipping activity as well:

Just because money is cheap does not mean it is going to boost the economy. Take a look at Japan and their multi-decade policy of quantitative easing. We are juicing markets up in many areas and conditioning the overall economy to negative interest rates. The crowding out is creating a new kind of landlord:

“Renting out foreclosed homes has increasingly emerged as an investment opportunity for Wall Street.

Financiers are busily studying ways to take the single-family home rental business, for years mostly a mom-and-pop affair, and make it a bigger industry. That has made it difficult for first-time shoppers to compete.”

So now you have to compete with Wall Street that receives favorable treatment from the government and Fed just to purchase an entry level home. This is becoming a closed loop system. The same financiers that made billions upon billions of dollars shelling out fraudulent loans and toxic waste are now gaining favorable treatment in locking up blocks of properties to jack up prices. The California median price is up 12.9 percent year over year while incomes remain stagnant. In Phoenix it is up a stunning 30 percent. Las Vegas? Up 18 percent year over year. These gains are on par with the peak years of the bubble. This mania is being caused by stringent control on distressed inventory and absurdly low rates courtesy of a Fed with a nearly $3 trillion balance sheet that is set to grow with QE3.

One of the quotes in the above article sums it up:

"Don't sell to regular people — just sell to us," Monks said these investors have told him.”

Just like the last bubble: any time you see festering stankholes like Fresno or Bakersfield (gotdamn Bakersfield!) are experiencing a ramp up in real estate prices, "the dam about to bust." Nobody has ever said "I finally got lots of money, Imma move to the south valley", and there's no money to be made renting out in places that have 15-20% unemployment in good years. It's obvious the free money freaks looking for the last unraped virgins in the real estate markets.

It's the same story as we've seen in Stockton, Modesto, Atwater, Merced, all the foreclosure capitals, they've just moved further south.

I have plenty of experience with this, as do my clients and extended family. Renting works, but it's plenty of dirty work, in college towns and small town Midwest. In California..., you might as well burn the money. Same result, much less aggravation.

This has been the plan all along - the collect as much residential real estate as possible during this crash. They will acquire the rest simply by bidding up rents until people willingly sell - 'cause they got no job ..

I believe this is covered in the documents regarding Agenda 21 - or somethign related anyhow - welcome to the slave farm.

Simple plan too. Sink the economy (yes, deliberately), good paying jobs disappear, people walk away from homes they no longer can make payments on, home market sinks, Bennie buys up all the secondary market paper (with printed cash) to keep that market from collapsing.

Deep pocket corporate / hedge fund / foreign buyers wait a few years for bank inventories to swell, then come in and buy bunches at 30 cents on the dollar, banks don't care, Bennie bailed them out.

Millions of former homeowners are renters now. The new feudal system phase I, corporations own everything, people are sharecroppers.

I keep saying it's a massive looting scheme. Loot the economy, loot the people, steal all their wealth, including their home.

How? Pump & dump the economy, Fed's favorite wealth stealing method done every decade or so. We're in the dump phase of this iteration, housing was the target.

Bennie is a magician. With a wave of his Ctrl-P wand he can magically create lots of cash to buy the home you worked decades to make payments on, then lost your job and mailed the keys back to the bank.

Part of the magic is getting it for 30% of what you paid.

But then it's not magic. You were suckered into buying it during the pump phase at some ridiculous high price thinking prices would keep going up.

Soooooo many things that make you go ew here. Of course properties are being sold to low risk buyers! ones who can buy in bulk too? even better! And who do you think is releasing the inventory data? Think diamonds are a controlled inventory market? Debeers has got nothin on the US housing market. The US media tells you what they want you to hear, doesn't tell you what they don't want you to hear.

The inventory is really low. I bought a house yesterday. It's a foreclosure that's been stripped. I wouldn't have done it but is was The house in The location. Two rounds of bidding war with 10 people offering cash BofA made an extra 10% above asking but less than it will be fixed up. My bid beat out second place by a couple hundred dollars. That's in a good section of the Bay Area. Sacramento on the other also has no inventory but no buyers as well. How many houses are being held back to create this flurry and more importantly why? Will the dam break open after the election?

You have to admire the big balls of the big banks...first slamming predatory loans on unqulaified borrowers, then imploding the housing market, selleing defective MBS (fraud), then taking back millions of homes through illegal foreclosure methods (robosigning)...Now with the help of taxpayer bailout money and changes in acounting rules they are financially strong (technically they are still insolvent), and they are manipulating the housing market so they can actually profit off the houses they took back in foreclosure. Fuck me, when will someone get some big balls and start hanging these fuckers from the lamposts?

When I took a high school German language course (in 1970), my text book offered snippets of cultural references. One of the things it mentioned was that most Germans rented their houses, which were owned primarily by insurance companies. Now it kind of makes sense how that happened.

nowhere to run from these people; every last penny to be squeezed out of the average person. don't play the game, buy as little as possible, do not take on loans & help each other. young generations team up with older generations to try to live life .

Its one thing to manage and maintain a 500 unit apartment complex. It's quite another to manage and maintain 500 homes within an area or a county and still make a decent return. Tremendous diseconomies of scale. Don't see this investment mania panning out for major players; unless of course there are significant tax breaks or other such inducement.

Management fees alone will fuck with the ROI, throw in property tax, repairs, (many bubble homes had pools blended intro the mortgage) again, what a renter has to shell out to maintain is less he has for rent. We do 10-12 home inspections a week and we are seeing many owners of rentals selling out. I just am not seeing huge increases in wages to offset this pie in the sky" buy now or forever be priced out" worn out bullshit they are piping into everyone's head.

yes there are great deals but what happens to home prices when interest rates rise? They will fall, it is and will ALWAYS be about monthly payment "What can I afford per month" when interest rates rise, and they have no where to go but UP housing prices will collapse...more.

Investors in commercial house are usually a few investments houses, a way for someone with a bit of money and minimal job responsibilites to put both to work. But the time drain for maintenance and tenant relationships burns them out at 4-5 properties.

My biggest client in this area has 30 properties all around a university, so centrally located. Maintenance on separate properties and client management of student/tenants is quite the circus.

Well said. I've been around farming for a hundred years, actually more. Both my grandfathers were farmers, and they tried to pound some sense into me, but between the drought and the fucking fed, I don't have a clue what land is worth.

By the time you wait for the "bottom" to be called by the MSM or even by Mr. Durden for that matter (no offence Tyler, you do run the best financial blog out there hands down), all of the prime real estate markets will be picked over, and a generational opportunity to buy a home at a low price will be gone, which is exactly what is happening right now.

Of course private capital and hedge funds would finally dive in and buy up all of the foreclosed inventory! Why wouldn't they? There are few investments offering better returns right now with limited downside than US housing. I'd take a rental home in Fresno over shares of AAPL any day.

Sure, you can blame the FED for this new 'mania', but you can also blame the poorly educated Boobus Americanus who couldn't do math well enough to figure out 2005-2006 was time to SELL housing and 2009-2010 was time to BUY, because, while the FED may be to blame for everything that is wrong with everything, everywhere, and all the time, the fact is any American with a job and clean credit can get a low fixed rate loan today from Fannie or Freddie (unbelievablly low by any standards). But Boobus Americanus either chooses not to buy because they don't want to get "burned" by housing, or they can't scratch together a $5000 downpayment because they are up to their eyeballs in credit card/student loan debt and they'd rather rent a home and have an Iphone and a new flat screen before buying into a 'risky' housing market. Sure there are smart Americans out there, but they are the minority.

The American public is just as much to blame for their financial ignorance (buying homes when prices were obviously unsustainably high, and renting while prices are at all time lows in real terms, not to mention buying Chinese made gadgets on credit cards that charge 18.9%) as private equity is for their agressive capatalistic tendencies. America is lucky that private equity is even interested and available to dig them out of a housing wreck, unlike Spain for example.

Too bad private equity managers can't (won't) teach average Americans the difference between what they pay on a $20,000 credit card over 20 years vs. what they pay on a $100,000 mortgage over the same period, and why one type of debt is financially smarter than the other. But learning that lesson (and implementing it) would involve forgoing instant gratification, which is clearly not an option for the average American.

Cultural attitude and poor education is the real downfall of America's middle class not the FED. The average Chinese bust their ass, save, and invest, something Americans haven't done since the '50s. And don't get me started on the value of a $50,000 college degree in Psychology from X State University. It takes a lot of suckers to make a scam work.